Today in the evening, it would be hard to expect any big surprises. It’s almost certain that the Federal Reserve will maintain the range for the federal funds rate within 5.25 – 5.5 percent. The market also does not predict any changes. The press conference after the meeting dare I say will be mundane. Powell will want to minimize expectations about the date of the first cut in the rate. In my opinion, greater volatility may arise on Friday after the NFP report’s hard data.
America’s central bank will likely want to hold out for a few additional inflation data. The disinflationary trend is continuing. The rate of decline has lessened slightly in recent times, confirming the theory that the last stage of inflation downturn will be a long and difficult process to implement. A promising note is that the inflation measure favored by the Fed (PCE core) dropped in December from 3.2 percent to 2.9 percent on an annual basis. The “two” at the front is certainly a joy for central bankers but does not guarantee that inflation will not be “boosted” in the coming months. Powell and his colleagues want to be sure that the trend is stable, which requires further confirmations in the form of positive publications. In the labor market, job opportunities are still increasing, and economic growth still seems very strong. This obviously poses the risk of renewed inflation. The Fed wants to avoid a decision-making mistake and still considers that it is better for the economy to maintain a restrictive stance longer than to soften monetary conditions too early.
The market currently prices in approximately a 40 percent chance of a decrease in rates in March, and slightly over 80 percent of a change in the cost of money at May’s meeting. At the same time, a June rate cut is a sure thing according to futures contracts.
Any hint from Powell about the March, May, or June meetings will garner a more significant reaction in the dollar or US bond yields. Recall that we will not receive any new macro projections or new “dot plot.” Thus, the market will only evaluate the official communication after the meeting and Powell’s words spoken during the conference. Single new statements, which were missing in December, may be of significance. However, their interpretation may not be straight-forward.
Łukasz Zembik Oanda TMS Brokers
